This article is relevant if you seek to use NetSuite to automate either accrual or allowance accounting at the transaction level.
Background
In a previous article, Automate Allowance Programs using NetSuite SuiteGL, I discuss the requirements to address allowance programs under the accrual method of accounting. The article is sound on its own because it addresses fundamental requirements that mature NetSuite-based accounting organizations address.
On a more recent NetSuite implementation, our client wished to implement a Marketing and Returns allowance program. Because we give all of our clients any software we have previously created without charge, we can meet their requirements rapidly once we are confident that we thoroughly understand their demands.
As we listened carefully, we realized that our Prolecto Sales Allowance Accruals bundle would need some adaptation to create more flexibility for defining rules that may overlap.
Sale Returns Use Case for Sales Allowance Accruals
One of the major use cases for this technology is to address NetSuite’s limited way that it handles returns and credit memo operations. NetSuite wants to debit the income account (sales) when a return is produced. However, in practice, most accountants want to debit Sales Returns, not the same account as standard Sales. Yet, as we dig deeper into the question of returns through an accrual lens, our goal really is to debit an allowance account which would have been formally constituted previously as a liability. The liability would have been recorded at the time of the original sale through a debit to returns expense and a credit to returns allowance liability. As such, when our clients ask us “How can we get a debit to Sales Returns?”, we respond “We understand your concern, but can you share how you are accounting for your returns allowances?” The deeper question reveals a more fundamental concern for which we properly address in the accounting treatment through the application of NetSuite platform technologies.
Enhanced Capacities for Flexible Allowance Program Definitions
Assuming you have read the Automate Allowance Programs using NetSuite SuiteGL article, you understand that we will be leveraging SuiteGL to post additional entries to drive the accrual program at a transaction level. The good news is that the SuiteGL programming is all behind the scenes. Instead, we define data in tables to drive the program.
There are two key matters to address in such a program:
- Qualifying Transactions: as a transaction is committed to the NetSuite database, does it meet the criteria for accrual allowance treatment?
- Apply Allowance Rules: assuming the transaction qualifies, what is the proper rule to apply which defines the program. What happens if more than one rule can be applied?
Qualifying NetSuite Transactions to Produce Accrual Allowances
As we thought more fundamentally about the challenge of having transaction qualify, we understood we needed the following:
- Global: do we want all invoices and credit memo transactions to qualify for allowances?
- Dimension Definition: might a line on a transaction that is of a specific dimension (location, class, department or custom) qualify for allowance treatment?
- Effective Dates: might transaction line only qualify within a certain time period? Perhaps there is a special sales program that will be starting soon but has a limited life.
- Item Definition: Does the item, including the Item Group, qualify for allowance treatment? This can also mean treatment for tricky discount items.
- Customer: might a specific customer have an allowance different from our global program?
With these parameters, we then can apply the rule we want.
Applying Rules to Qualified Transactions
As you define qualification rules, you may find that it is easier to think globally, and then narrow and further narrow down on something on the transaction that gets specific treatment. This gives you the maximum capacity to be creative to get the rules applied. At the end of the day, you want to define the transaction line percentage value(s) and then the debits and credits for the program.
However, by supporting flexible qualification rules, there is a good chance that multiple allowance rules will match a transaction. This usually is not desired — yet it may be depending on how you set up your rule models.
Once you have a transaction that qualifies, the most important consideration is what happens if multiple rules apply. Here, we allow each rule to be defined with options and ranking so that one or more rules will apply. By allowing or disallowing overlaps, you have much capacity to get rules to apply to different situations. Here are the options:
- Add & Allow Replacements: good for global rule definitions, apply the rule and allow it to be replaced by another rule that matches.
- Add & Disallow Replacements: go ahead and allow the rule, but once in place, do not allow it to be removed. Good for locking in a rule.
- Replace Matched Global Rules: apply the rule only if there is a global rule defined that is of type “Add & Allow Replacements”. Else, don’t apply.
- Replace Matched Siblings Rules: apply the rule only if there is a sibling with the same rule. See siblings below.
Once you have many rules in place that may match, it is important to produce a ranking so that the options can be evaluated. A lower number is evaluated first. Subsequent rules are evaluated in light of rules that have already been evaluated. Rules with the same rank number are considered siblings. Have a look at the related image to see the GL impact on a transaction that has the sales allowance rules defined.
NetSuite Accounting Automation
My hope in the article is to help you see that when it comes to accounting, you indeed can make the NetSuite system behave the way you desire. Thus, the power of the NetSuite platform is revealed through the cross-section of accounting principles, NetSuite customization, and innovation. Because allowance accounting is often done at month end, the use of automation tools assist the business in closing faster and it allows you to make better real-time economic assessments.
Perhaps you want to get better help to drive your accounting automation? If allowance accounting is your concern, let’s have a conversation.